US Government Wins Court Battle In Tax Shelter War

by Leroy Baker, Tax-News.com, New York

09 August 2006

The US Internal Revenue Service and Justice Department won a significant court victory last week in their ongoing fight against the use of abusive tax shelters.

The decision last Thursday by the US 2nd Circuit Court of Appeals in favor of the IRS overturned a 2004 ruling by the District Court of Connecticut to refund TIFD III-E Inc., a subsidiary of General Electric Corp., more than $62 million in tax.

At the heart of the case was a complex set of transactions involving three GE subsidiaries which formed a partnership, Castle Harbour, in 1993, to which GE contributed a number of aircraft in addition to cash and stock worth more than $500 million in total.

The partnership’s three shareholders, of which TIFD III-E was one, then sold their stake to two Dutch banks, NG Bank NV and Rabo Merchant Bank NV. For tax purposes, the subsidiary's income was allocated to the banks, which did not pay US income taxes.

Last week's decision was hailed by Eileen J. O'Connor, Assistant Attorney General, as a "paving stone in the department's path to stopping abusive tax shelters and restoring integrity to the federal tax laws."

However, the US tax authorities have not always had it their own way in the courts as they attempt to close down various forms of abusive tax sheltering.

Last month, a Texas judge ruled that the government exceeded its power by outlawing a shelter known as 'Son of Boss,' a decision which could have a bearing on the outcome of the trial of 16 former KPMG executives who are accused of helping wealthy taxpayers to avoid billions of dollars in tax by selling them various tax schemes, of which Son of Boss was just one.

However, this decision may, in the longer-term, may be only a minor setback for the government in the wider crackdown on tax shelters.

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